Monday, December 17, 2012

Defending Macro Research Against People Who Aren't Really Attacking It

Paul Krugman again laments the state of macro, and links to a blog reaction to a Delong interview. Yet, I'm struck that the conversation maligning the state of macroeconomic research never actually feels the need to mention macroeconomic research. For instance, Krugman and Delong both agree that we have inadequate aggregate demand. They both believe that monetary stimulus should be tried, meaning raising the expected future rate of inflation and/or NGDP. So if we have a monetary disequilibrium, should we not ask the top monetary economists what to do?

Bernanke and Gertler are long-time coauthors. Both of their research focuses on monetary policy, the macroeconomy and financial frictions. Also, Bernanke was an outspoken critic of Japan's central bank and the lost decade. If there was anyone with the type of intellectual pedigree and viewpoint that would be able to prevent a similar occurrence here, it was widely agreed Bernanke was that person. (I'm pretty sure Krugman said as much and he supported Bernanke's appointment).

Svennson and Woodford are the preeminent New Keynesians. Especially in Woodford's case, he's been outspoken for price level targeting and some measure of fiscal stimulus. Svennson is best known for the "target the forecast" view. The idea that central banks should be forward looking. The view championed on the blogosphere by Scott Sumner. Here are Woodford and Svennson writing together on the idea.

Look, its no secret that this is great research that Krugman and Delong love. It also turns out that it has been incredibly rewarded by the profession. The profession agrees that these are all top monetary economists. So what happened?

I would say one thing that happened is that business cycle research and monetary economics became less cool. During the great moderation business cycles didn't seem that bad. For instance, macroeconomists spent more time asking questions about the income distribution and wealth distribution. Mapping the U.S. income distribution into the U.S. wealth distribution is a puzzle. It seems wealth is too unequal. Macroeconomists started trying to map stylized facts of finance. Why do stocks have such a high return compared to bonds?

Even this marginalization of monetary economics might be overstated. Looking at the H-Index, Woodford only drops to 16th and above him are names like Rogoff, Blanchard, Summers, and Stiglitz that I don't think Krugman and Delong feel any need to distance themselves from.

So what's the problem with academic research? Lots of economists that Krugman, Delong and I think are great are getting lots of citations and top publications. And if they want to go after Fama, Lucas, Barro and Cochrane for their research, then do it! Don't quote newspaper articles and lament that macroeconomic research is to blame.